The mainstream media was largely successful in convincing the public that the dreadful first quarter GDP number (-2.9%) was the result of the bitter winter in January and February. The media spin was that the economy would snap back strongly in the second quarter with growth of 4%, 5% or even 6%. While there were some encouraging economic reports in April, May and early June, the economy now appears to be losing momentum again.
Predictions of 4-5% GDP growth in the second quarter have faded. A new Wall Street Journal poll found that forecasters on average expected second quarter GDP growth of only 3.1%, down from a 3.5% estimate. The same poll of 48 forecasters now expects the economy to grow by only 1.6% for all of 2014, down from 2.8% forecasted earlier this year.
Despite this dimming economic outlook, the media is now concerned that the Fed may begin raising interest rates sooner rather than later, and that the expected series of rate hikes will happen more rapidly than previously expected. But is there any real evidence that Janet Yellen and Fed have changed their plans? I don’t think so.
Zero Interest Rates?
New revelations have suggested that our new Fed Chair, Janet Yellen, may be the most liberal person to ever hold the highest monetary office in the world. This news comes after a recent extended interview Ms. Yellen did with the New Yorker Magazine and her testimony before Congress earlier this year.
Yellen made it clear before Congress that she is quite willing to keep the zero interest rate policy (ZIRP) in place considerably longer than most forecasters have been thinking. That will continue to punish savers and those on fixed incomes. The New Yorker Magazine reported: “Yellen is notable not only for being the first female Fed Chair but also for being the most liberal since Marriner Eccles, who held the job during the Roosevelt and Truman Administrations.” [Emphasis mine.]
Based on her New Yorker interview, it increasingly seems that Ms.Yellen sees ZIRP and quantitative easing (QE) as tools to promote progressive social policy and to essentially pick up where formal federal social programs leave off. Put simply, she may be the most dovish and politically leftist Fed Chair in the central bank’s history.
In The New Yorker interview, she unabashedly presented herself as a liberal and a pure disciple of John Maynard Keynes. Keynes, a British economist in the 1920s and 1930s, was an outspoken advocate of increased government spending and weakening of the currency (Keynesianism) as a way to strengthen the economy. You would think we should have known this before Yellen became the Fed Chair or Vice-Chair.
She also revealed that she was an opponent of economist Milton Friedman, Ronald Reagan and Alan Greenspan, figures who are widely credited with having led the rightward movement of US economic policy in the last three decades of the 20th century, which saw robust economic growth. Yellen referred to that era as “a dark period of economics.” Wow!
The belief that central bankers are empowered with the ability to create jobs (or eliminate jobs) is a dangerous delusion. As her commitment to social justice and progressivism is now a matter of public record, should we be concerned that she will push for more liberal monetary policy from the Fed for the duration of her tenure?
Yellen: No End to Zero Interest Rate Policy in Sight
In her congressional appearances, Yellen made clear that the end of the Fed’s multi-year experiment with zero percent interest rates is nowhere in sight. In fact, the event is less identifiable today than it was before she took office and before the economy supposedly improved to the point where such support would no longer be needed.
Her testimony before Congress earlier this month called into question her comments earlier this year when she suggested that the first move to raise the Fed funds rate would not likely occur until at least six months after QE ended. Now she sounds like ZIRP could continue indefinitely.
At one point, Bernanke said rates might begin to rise once the unemployment rate fell below 6.5%. But when that happened earlier this year, Yellen said that it was merely one factor in a larger decision-making process.
But Yellen has gone even further, disregarding all previous thresholds and claiming that she will keep stimulating (ZIRP) as long as she believes that there is “slack” in the economy, which she defines as any level of unemployment above the level of “full employment.” Where that mythical level may be is open for interpretation, and that may be why she prefers it.
As noted above, the Fed’s traditional “dual mandate” is to balance the need for job creation and price stability. But Yellen clearly sees jobs as her top priority over price stability. One wonders if she will put this priority aside and move forcefully to fight inflation when it officially flares up in the future. We’ll have to wait and see.
In summary, QE will come to an end in October, barring any major surprises. The Fed made that official in the minutes from the June 17-18 FOMC meeting. However, as for ZIRP, Yellen vows that she’ll keep short rates near zero indefinitely if she believes it’s needed. This is disappointing news for savers and those on fixed incomes.
Illegal Immigration: America’s #1 Problem
A new Gallup pool found that Americans now believe that immigration/illegal aliens is the most important problem facing the country today. As Gallup noted, that is up from 5% from June and the highest seen since 2006. This is due of course, to the humanitarian crisis occurring on our southern border.
Gallup found that “dissatisfaction with government” came in second place on the list of the country’s top problems. For most of the year, it was the economy in general or unemployment/jobs that topped the list of America’s most important problems. But those have now dropped to the number three and number four spots.
Despite the media’s efforts to cover up the border crisis, most Americans recognize the importance of this grave situation. They also recognize the government’s ineptitude in dealing with this crisis.
Gary D. Halbert is the president and chairman of Profutures, Inc. Subscription rates for Forecasts & Trends is $197 for 12 issues and may be obtained by visiting his website at www.profutures.com